VIAG and the German Nuclear Power Industry in 1998

Daniel Diermeier and Jens Roedel

Background

As late as September 1998 everything seemed to go well for the German nuclear power industry.  At the World Energy Conference in Houston, Texas, German top managers voiced the option that the worldwide growing energy demand could only be mastered with the use of nuclear power.  there was even speculation about the construction of new nuclear power plants in Germany.  Four weeks later, the German energy industry was in disarray.  Within days, the shares of the three leading energy companies, RWE, BEBA, and VIAG lost up to 10% of their value.  The reason was a change in the German government as a consequence of federal elections.  A center-right coalition under chancellor Kohl (composed of the parties CDU/CSU and FDP) that had governed the country for more than 16 years had been defeated be a coalition of the Social Democrats (SPD), a center-left party, and the environmentalist German Green Party.
It was expected that the Green Party would control the Ministry of Environmental Affairs that has regulatory oversight over the nuclear power industry.  Many of the leading Green politicians had started their political careers as anti-nuclear activists in the debate on nuclear power, one of the most controversial issues in the 1980s and one of the main reasons the Green Party was founded.  Just months ago, the designated Minister of Environmental Affairs, Juergen Trittin (Greens) had demonstrated against rail transports of nuclear waste.  In their electoral party platform the Greens had stated as one of their major goals Germany's long-run exit from nuclear power generation.  First shut downs of nuclear power plants were supposed to be implemented by the end of the legislature period in 2002.  This goal was also incorporated into the SPD-Greens coalition agreement.
 

VIAG AG

VIAG AG is Germany's 14th largest industrial corporation and one of its leading power utilities.  Its activities are split into five groups:  energy, telecommunications, aluminum, packaging, and chemicals.  In 1994 VIAG acquired Bayernwerk AG, a major German energy producer.  This made the company the third largest energy producer in Germany behind RWE and VEBA.  VIAG successfully pursued its development strategy in fiscal 1998.  At DM 49.1 billion, group sales were slightly below the level of the previous year.  Adjusted for acquisitions and divestitures, however, sales increased 4%.  Consolidated net income for the year advanced 24% to DM 1.5 billion.  The sustained improvement of the group's earnings is reflected in a 10% increase in earnings per share.  At the end of 1998, VIAG had 86,694 employees.

The markets in which VIAG operates are highly profitable and promise strong future growth.  The group's corporate structure features decentralized management with flat hierarchies, no cross-subsidies between business sectors, and an unconditional commitment to expanding their core businesses while abandoning those businesses in which they cannot achieve lasting profitability.

Bayernwerk AG, the large company of VIAG's energy division, is one of Germany's three biggest energy companies.  The corporate restructuring undertaken in 1998 and the expansion of business activities in central Europe are vitally important to the group's future success.  The company generated sales of approximately DM 11.1 billion in 1998, of which 89% are attributable to electricity and the remaining 11% to gas and other energy sources.  Net income in 1998 reached DM 668 million, which was slightly higher than in the previous year.  At the end of 1998 Bayernwerk employed 17,360 people.  In 1998 Bayernwerk produced 72.6 TWh of electricity, 38.8% of which came from nuclear power reactors, 14.9% from conventional thermal power, and 6.9% from hydroelectric power sources.  26.7% of the energy was purchased on the market.

The German Electricity Market

1998 marked the beginning of a new era for the German electricity market.  Since late April 1998, when the amended Energy Industry Act went into effect, the market is now completely deregulated.  Electricity customers are entitled to choose their own electricity providers without restrictions.  Moreover, the first phase of the deregulation of electricity markets in the European Union began in February 1999/  The relatively high German electricity prices and the now open market make the German market attractive for foreign providers.  Germany will be one of the countries on which international competition will concentrate.  Companies such as ENRON and Southern Company are already operative in Germany.  VASA Energie, in which Sweden's biggest power company Vattenfall is a substantial shareholder, is concentrating on cooperation with municipal utilities, predominantly in power generation.

German electricity consumption in 1998 totaled 476 TWh.  The top three German power supply companies are RWE energy, PreussenElektra, a subsidiary of the VEBA group and Bayernwerk AG.  These together produced 340 TWh of 71.4% of total German energy consumption in 1998.

RWE energy is the leading German electricity supplier.  It is a subsidiary of the RWE group, which is Germany's ninth largest company with business activities in energy, mining and raw materials, petroleum and chemicals, waste management, engineering, and telecommunications.  RWE Energy generated sales of approximately DM 22.6 billion in 1998 of which 88.9% are directly related to electricity sales.  Net income reached DM 1,011 million, which was 27.3% higher than the previous year's figure.  At the end of 1998 RWE Energy employed 42,236 people.  In 1998 RWE Energy produced 161.1 TWh of electricity.  66.1% are coming from hard coal and lignite power plants, 22.6% from nuclear power, and 11.3% from water, gas, and other power sources.

PreussenElektra is the second largest German electricity supplier.  It is a subsidiary of BEBA, which is Germany's fifth largest company, with business activities in electricity, oil, telecommunications, distribution/logistics, real estate, and silicon wafers.  PreussenElektra generated sales of DM 15.9 billion in 1998.  Net income in 1998 reached DM 1.851 million, which was slightly lower than the previous year's figure.  At the end of 1998 PreussenElektra employed 31,936 people.  In 1998 PreussenElektra supplied 111 TWh of electricity, of which 65.9 TWh came from own production, and 45.1 TWh were purchased from external suppliers, 61.3% are from hard coal and lignite power plants, 34% from nuclear power, and 4.7% from water, gas, and other power sources.

Energie Baden-Württemberg AG--EnBW for short--was set up in 1997 in response to the new competitive energy market in Europe.  It is a merger of two electricity companies, Badenwerk Holding AG and Energie-Versorgung Schwaben Holding AG.  The objective is to provide better solutions for energy customers.  Energy supply is EnBW's core business.  It is fourth largest energy supply company in Germany.  Overall, group activities comprise the following sectors:  waste management, telecommunications, industry and services (including building and property management), and transport.  Electricity sales contributed around DM 7.7 billion, with gas accounting from DM 108 million and district heat for around DM53 million.  In comparison with the previous year's revenue, electricity sales fell slightly.  Not only did EnBW sell less electricity to tariff customers as a result of mild weather, but also price negotiations with the contract customers were already affected by the imminent deregulation of the energy market.  The EnBW Group operates many fully owned, partly owned, and leased power stations.  In 1997, nuclear energy accounted for 57.5% of generated power, with coal, oil and gas providing less than 27.9%, and hydroelectric power stations supplying 9.5%.  Of the supplied power, 5.1% was procured from external companies who supplied energy as a primary source.
 

The German Nuclear Power Industry and its Nonmarket Environment

The four nuclear power companies, RWE, VEBA, VIAG and EnBW operate 19 nuclear reactors in Germany.  In total, these reactors produce 34% of all German power.  This makes nuclear power the most important energy source, followed by brown coal (29%) and hard coal (25%).  while nuclear power was heavily subsidized by the German government, it is now cost effective.  It also helps to reduce fossil fuel consumption and, thus, it is instrumental in reaching the limits for carbon monoxide emissions (the suspected cause of the greenhouse effect) that had been agreed upon during the 1998 world climate conference in Kyoto.
The nuclear power industry provides a total of 34,000 jobs in Germany.  Furthermore, in case of an exit from nuclear power, Germany would have to import electrical power from neighboring countries to compensate for the 38% of lost nuclear power supply.  This imported energy, however, would be produced partly in nuclear power plants, which have safety standards that are below German ones.

Siemens AG, the third largest German company, produced all 19 German nuclear power reactors and has since then provided security upgrades.  Furthermore, Siemens is the sole provider of nuclear fuel, the first input in the nuclear power generation cycle.  This fuel is burned in the nuclear reactor.  After its use, it is then stored for one year in a special basin within the plant where it loses 99% of its radioactivity.  Thereafter, when its radioactivity is low enough to be transported, it is brought to a reprocessing plant either in France or the UK.  To transport the still radioactive waste, the waste is put into so-called CASTOR containers that limit radiation to below a threshold value specified by Federal law.

During the reprocessing process, the fuel is separated into high, medium, and low radioactive waste and plutonium that can be used again for fresh fuel.  Reprocessing, however, has been a highly controversial topic for at least 10 years.  Activists prevented the construction of a reprocessing plant in Germany years ago and argue today that the safety standards of foreign processing plants are not in line with German safety laws.  Reprocessing was mandatory until recently.  After an amendment to the atomic law, direct final storage is possible today.  This means that used fuel does not need to be reprocessed; it can be sent immediately from the nuclear power plant to temporary storage.  Opponents of nuclear power have argued that reprocessing increases the number of risky transports of spent fuel by rail, road, and sea to a reprocessing plant.  there is also widespread concern about the health risks of reprocessing, especially since clusters of childhood leukemia around reprocessing plants were detected.  Finally, plutonium can be used for production of nuclear weapons.

After reprocessing, the radioactive waste is transported back to Germany to a temporary storage site.  Since the waste generates large amounts of heat, it must be cooled continually for approximately 50 years.  Two sites in Ahaus and Gorleben are available as temporary storage places.  Together they have a capacity of 7,760 tons of which only 15% is utilized today.  After cooling in temporary storage, the waste will be brought to a final storage location, preferably deep underground.  Up to now, no final storage site exists in Germany.  A preferred location from the energy industry's point of view is the saline stock in Gorleben.  During the last years, more than DM 2 billion have been invested in investigating the feasibility of the Gorleben storage site.  While many geologists argued that Gorleben shows very good characteristics for the storage of nuclear waste, activists repeatedly questioned the official numbers and relied on their own expert studies that show different results.  This conflict received broad coverage in the German media and repeatedly dominated public debate on German energy policy.

The CASTOR transports have become a political symbol of the debate on nuclear power.  Activists repeatedly tried to block the transports by organizing sit-ins on streets and train tracks, or by cutting out parts of the train tracks.  the previous German government had relied mainly on the massive use of police force to limit the protests.  In addition, the state government of Niedersachsen (Lower Saxony) had repeatedly tried to block the transports using its regulatory oversight within state borders.  While these attempts were unsuccessful given the supremacy of Federal regulation, they indicated the will of nuclear power opponents to use a broad range of political means.  Ominously for the VIAG, the Niedersachsen state government was composed of a coalition of the Greens and the SPD under state prime minister Gerhard Schröder, the designated new Chancellor.  On the other hand, prime minister Schröder had established a record of pragmatism in dealing with the car industry, especially Volkswagen, partly owned by Niedersachsen with its headquarters and main production facility in the state.

The Green Party and activist organizations are demanding an immediate stop of reprocessing.  However, Cogema (France) and British Nuclear Power, the two reprocessing firms, have long term reprocessing contracts with all German nuclear power operators.  These contracts run until 2004 and provide the two firms with revenues of up to DM 15 billion.

People's opinion in regard to the further use of nuclear power plants seems to be stable.  In a January 1999 survey, about 76% of the German inhabitants agreed with the further use of nuclear power plants.  Of the 76%, 43% opted for long-term use, whereas 30% would prefer to shut them down within a shorter time period.  In a 1998 survey vote, 69% of the population supported the use of nuclear power.
 

Questions

1. What are the main threats for VIAG?
2. Develop an integrated strategy for VIAG.  Be specific about how the strategy is to be implemented.